Dean, the retort I think you'd hear from most reporters is that most of the voices who've made accurate calls on the last two bubbles are "fringe" voices -- either left-wingers like yourself or libertarian-leaning goldbugs (most of whom don't have the requisite academic pedigree anyway). And so, reporters will continue to consult the "safe" Brookings-Heritage axis so they won't be sneered at the next time they're at a cocktail party with, well, Brookings and Heritage types.

One of the problems for economists making predictions is their perception of the effect of their predictions on people's behavior. For instance, if 50 leading economists all said that we were going into a recession that in itself would have some, unknown, effect on business confidence.

Concern about the impact of their statements is likely to be asymmetrical such that they are likely to be less concerned with being overly optimistic than with being overly pessimistic.

One possibility for examining this would be to add an additional element to surveys seeking economists predications. This would be to ask them at the same time as they are making their prediction for public release to include another prediction which would be anonymous and remain sealed for a year.

At the end of the year their public predictions could be compared with their anonymous private predictions and with what actually occurred.

"Since the vast majority of economists failed to recognize two huge financial bubbles, the collapse of which had enormous consequences for the economy, it is reasonable to conclude that there is some inherent problem with the nature of the consensus within the economics profession."

Yes, that's reasonable.

"Either these economists hold views about the world that prevent them from seeing financial bubbles, or the sociology of the profession is such that they are unable to express independent opinions."

If you want to express the idea as the "sociology of the profession", then that would encompass Paul's point above. There's an aspect of their probable bias that you've left out, though - many are talking their book. They either work for investment banks, the government, or industry groups (like Real Estate) or do contract work related to one of those businesses. The people paying their paychecks all have an interest in a rosy picture. While that's an aspect of the "sociology of the profession", the term is sufficiently far from "mercenary interests" that I think it deserves to be called out separately. Note that you don't even have to think that the relationship between their opinions and their paychecks is explicit to think that there's a correlation.

I guess I've tipped my hand as to which one I believe is the big influence - though of course all three contribute. I'd imagine that economists, more than any other profession, should be open to the idea of money having an influence on a supposedly impartial opinion.

If you want to see the economist who posted about both bubbles, and is probably the most prescient exonomic site on the web, it is Eric Janszen's www.itulip.com

Well, I'm going to continue to be the devil's advocate here because I think it's a useful role. You seem to be asking economic reporters to give equal weight to mainstream and consensus views in the economics profession. So, how do you distinguish that from reporters who give equal weight to climate scientists who say that anthropogenic global warming is real and dangerous, and those who dissent? Scientists who say that tobacco causes cancer and heart disease, and those who dissent?

I might have an idea or two about this, but you need to tell us what yours is. If reporters emphasize the consensus view among experts, how are they being irresponsible? If they give equal time to people who most experts regard as on the fringe, aren't they misleading the public?

I'll take my answer, as they say, off the air.

sorry, instead of "consensus views" I meant "non-consensus views."

The fundamental error reporters make when they ask only economists about markets is that most economists don't know anything about real markets because they are studying their idealized models where everything is always in equilibrium and bubbles are basically impossible. Ask market watchers and traders--and be prepared to have them mislead you to further their own interests.

cervantes wrote, So, how do you distinguish that from reporters who give equal weight to climate scientists who say that anthropogenic global warming is real and dangerous, and those who dissent? Scientists who say that tobacco causes cancer and heart disease, and those who dissent?

Because in the case of markets, there's a long record---centuries long, in fact---showing that spectacular rises in asset prices are often, if not always, followed by a spectacular crash. You don't need to ask an expert---you merely need to be acquainted with some basic finance history like the tulip bulb craze.

Tobacco---it depends. The case that smoking tobacco causes lung cancer needs no expert support, because the odds ratio is so high. Second hand smoke is different---the statistical analysis is presumably much more subtle because the effect size is much smaller.

Climate change: again, it's an extremely technical area, where except for simple math disputes that have arisen, one pretty much has no choice but to rely on experts (since the argument is based on extremely complicated climate models).

Overall, though, your point---made in repeated posts---seems to be that reporters have no choice but to poll experts. That assessing the truth on their own, without mindlessly using a (possibly weighted) polling of experts, is not possible.

This seems like a wholesale rejection of Enlightenment values. The notion that anyone---journalist or otherwise---is completely and always beholden to some class of "experts" is nonsensical and, in the final analysis, repellant.

Again, the notion "what goes up must come down" is so basic to finance that even a mere "reporter" who is unacquainted with the notion should be looking for another job.

Jim D wrote, I'd imagine that economists, more than any other profession, should be open to the idea of money having an influence on a supposedly impartial opinion.

Sweet!

As I like to say: why is it that the economists' mantra---"incentives matter"---is so infrequently applied to themselves?

One way you can do this is look for red flags. One thing in common with rosy economic reports, anti-science tobacco claims, and anti-science global warming denialism is to look at the massive funding the contrarions are getting and from who. Do they have something to sell which they are selling by putting forth the claims they do? The answer in all those is yes -- in fact, the tobacco companies fund both tobacco nonsense and global warming nonsense. Scientists can "sell", if that's what you'd call getting grants (I wouldn't, because it's not really much like it, but it's a popular claim) by doing any side of an issue as long as they have facts on their side. In fact, science that pushes a new and different view gets the most dollars and fame flowing to the researcher(s) as long as they can support their case.

50 economists, not one saw either bubble coming; what good are they? The "fringe" on the left and right who saw this coming should get their jobs, if performance and merit should beget pay.

These economists are working for the same elite interests who positioned themselves to profit from this crash- the private owners of the Federal Reserve system

Why should the US money system be under the private, secretive and no oversight control of a cabal of bankers who've caused the dollar's value to decline by 90% since 1913, while they've taken us into war after war?

"One thing in common with rosy economic reports, anti-science tobacco claims, and anti-science global warming denialism is to look at the massive funding the contrarions are getting and from who."

Yes it is interesting to look at such things, but that does not necessarily invalidate the claims that they may have. It is not an argument that can be used to say whether something is more likely to be true. If I were funded by a government that embraces the idea of man made climate change and I would produce results results that also embrace this, this would not make the arguments that I have for my position on climate change better or worse. Of course one can suspect that my position is related to my funding source, but that should never be the key argument.

Similarly I think that when a journalist inquires on the state of the economy it would be better to include all positions and not x times the same position in the arguments . One could let the viewers decide for themselves which position is the more realistic one.

Cervantes,

All areas of science are to some extent self-contained. They control their own credentialing process -- they decide who gets the top positions and which articles get published in the top journals.

This means that there are opportunities for abuse. It will be difficult for non-experts (including reporters) to determine where such abuses are preventing serious arguments from being presented.

However, when the predictions of the mainstream of the profession are repeatedly shown to be wrong, as they have been in economics, then reporters should be viewing the consensus with skepticism.

I can give a long list of very important topics (not just the bubbles) where the mainstream in the profession has been shown to have been wrong.

For example, just over a decade ago, the mainstream was absolutely contemptuous of anyone who argued that unemployment rate could below 6.0 percent (the old "NAIRU") without accelerating inflation. Now, everyone recognizes this is true.

I also remember arguing with the Boskin Commission people who argued that the CPI overstated inflation by 1.1 pp each year in an effort to cut Social Security. There were some modest changes to the CPI (about 0.3 pp in the Boskin Commission's view), but now no one is complaining about the overstated CPI.

I could add many others, but the point is that the consensus within the profession has repeatedly shown to be wrong. Good reporters know this and therefore seek out views that are outside the consensus.

cervantes brings up a very interesting point, one that I was thinking of but from the other direction.

Why does the press give the dissenters on climate change equal time on the issue (or at least used to)? Yet those without irrational exuberance in the bubble years are not called upon to voice their opinion and back it up.

I remember reading concerns about the housing bubble by both Dean Baker and Paul Krugman in 2005. But where was the reporting on their concerns that have become our reality?

I have to side with Dean on this, but more from the fact that much of reporting is either he said, she said or just the consensus (read run up to the war and the all the former military folks weighing in) that isn't really a consensus.

Well, here's a potential solution. What about a warning label on every story reporting consensus opinions of economists.

"This article reports a consensus opinions of fools and knaves that may be hazardous to your wealth."

I think Dean's point is valid now, but it is not as easy to criticize the press for listening to the concensus back in 2005, before it was proven wrong (although it had been on other issues at other times). Certainly now, going back to the people who goofed is silly.

Regarding the herd mentality, Keynes noted this in the General Theory, that one gets blamed much more for making a lonely wrong forecast than one gets credit for making a lonely correct forecast. So, there is a tendency for forecasters to herd together so as not to stick out and get especially blamed when they are wrong. That is how they get to keep getting quoted, even when they were wrong, but wrong en masse.

Barkley

. . . the vast majority of economists failed to recognize two huge financial bubbles, the collapse of which had enormous consequences for the economy . . . . Dean Baker

Poppycock!

By "enormous consequences" I presume Baker is referring to the 2001 recession and the likely 2008 one.

The 2001 recession, short and shallow, was caused by a fall in business capital investment. That fall
was due to investment having been pulled forward to meet Y2K concerns and to excess investment related to building out the internet (fiber, routers, etc. -- much of it seller financed) which became bad business when buyers couldn't pay, fiber remained dark, and the Fed raised interest rates.

The collapse of the stock market bubble had no discernible effect upon the economy.

The house price bubble which reached its height in late 2005 or early 2006 is in the process of collapsing -- not because it was a bubble but because there is excess inventory resulting from overbuilding in 2006 and 2007 and a large number of foreclosures.

Whether a reduction in house prices will have "substantial consequences" for the economy is yet to be known. It certainly hasn't, yet.

It seems to me reasonable that reporters wouldn't be seeking the opinion of an economist whose claims are so little supported by economic facts.

Somewhat related to this are email alerts I get on economic topics from CNN, and seemingly every week they say something like this week's offering: "Oil prices spike more than $3 a barrel after government report shows surprise drop in crude and gasoline supplies." I'm wondering if they'll ever stop being surprised.

Ellen1910,

I think the 2001 recession had some huge impacts on the economy. It gave Bush a reason to push through tax cuts as they were to stimulate the economy, and Greenspan did a back flip to support them.

It reduced the value of pension funds, the value of insurance holdings (which could or may have raised premium prices), and the list goes on.

Housing bubble has lead to a bail out of Bears Stearns, that isn't chump change. It has impacted the student loan market.

For me the unspoken reality is this, since consumer spending drove most of the growth since 2001, and that consumer spending was driven largely by spending on the value of debt taken against the value of the house. With people now limited in their ability to borrow against their house, either with stricter rules, or falling house prices, where is the consumer (with relatively stagnant wages) going to find the money to be able to keep the economy going.

Ellen,

I love it when people use such assertive language as "poppycock," and then make complete fools of themselves, as you just did.

Most analysts have argued that the decline in capital spending in 2001 was at least partly tied to the crash of the high tech stock bubble. Yes, there was some cutback due to the ending of the Y2K surge, but that does not account for all of it. There had been a lot of startups going forward in 1999-00 unrelated to Y2K spending, and that simply stopped cold after the crash for several years.

As for that inventory buildup of housing you refer to, where do you think it came from? This is the normal outcome of a speculative bubble, which entails price rising substantially above longer run equilibrium. There is eventually a quantity supplied response to that higher price, which in the case of a large durable like housing takes some time to get going, but once it does, it eventually leads to a massive buildup of inventory that becomes a major trigger for the crash. Duh, Econ 101, Ms. "Poppycock."

Well, Barkley; I assume you passed (barely?) Econ 101, but you obviously didn't pass Eng 101.

Where are the "enormous consequences for the economy"?

P.S. The answer to your question of where the housing inventory buildup came from is obvious -- from the decisions of greedy executives in the homebuilding and financial industries.

I just tried to post on this and failed. One more effort.

Ellen, you are still wrong about what caused investment to go down. Josh has it; the recession was shallow because of some of the most stimulative fiscal and monetary policy ever seen.

As for "greedy executives," this is just silly. In Econ 101 we assume that economic agents are profit-maximizing, meaning they are greedy. So what? Hence we fully expect that if there is a price bubble, meaning price gets "too high," those greedy profit maximizing executives will increase supply "too much," leading to exactly what we see now. Duh.

That last anonymous was me, Barkley, whom Ellen thinks just barely passed Econ 101. Google me, Ellen. Go read my Wikipedia entry.

. . . the most stimulative fiscal and monetary policy ever seen. Barkley Rosser the Commenter Formerly Known as Anonymous

Monetary policy takes time to have its effect -- a minimum of 6 months according to Barkley's "analysts" whom he cites, above, in lieu of thinking for himself. On April 18, 2001, the Fed lowered the discount rate to 4.5% -- not exactly the "most stimulative monetary policy ever seen." And six months later -- poof! -- no more recession.

Still haven't answered my criticism of Baker for being a Chicken Little, have you Barkley.

Where were the "enormous consequences for the economy"?

Ellen,

Well, if what you mean by Dean being a "chicken little" is that we have not clearly gotten into a recession yet, that is correct. We have not clearly done so, although we are in dead stall, with housing the big negative drag, offsetting an export boom due to the falling dollar. However, it is also clear that we have not yet hit bottom in the housing sector, so we shall see.

Gee...a well known, published economics academic, or an anonymous poster with no credentials and an ideological axe to grind...where is gladstone when we need him to help out his fellow nutjob?

Nellie the Ellie wrote, Gee...a well known, published economics academic, or an anonymous poster with no credentials and an ideological axe to grind...

Logical fallacy---appeal to authority. And look where that got us during the housing bubble.

The point, rather, is that on the facts, Barkley is right, and Ellen1910 is wrong.